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Sprint 1 – Financial Proposal and Financial Due Diligence
In determining the scope of our first sprint, we conducted a risk assessment to identify areas where our Office could provide the most value through the conduct of our work. As part of our risk assessment, we took into consideration concerns raised to our attention from members of Council and residents of Ottawa.
OAG Mandate
It is important to remember a few key considerations associated with independent audits performed by the OAG. To remain independent, the OAG must be separate from all management activities and therefore, can only evaluate analyses, estimates, decisions, and recommendations made by management.
The OAG cannot create the analysis or make decisions. This limits us in what we can look at and when. We can only apply audit procedures when sufficient work has been done or decisions have been made such that we can apply our audit procedures against.
Scope of the Audit
The scope of our first audit sprint was limited to the financial proposal presented to City Council in November 2023 and the associated due diligence applied to it. This included key assumptions related to: proceeds from the sale of air rights, event ticket revenue, sponsorship revenue, retail revenue, parking revenue and property tax uplift and associated project costs including construction costs, operating expenditures and business interruption costs.
The audit scope did not include the non-financial elements of the proposal, or any associated due diligence work conducted thereon.
Our Office recognizes that this audit sprint does not answer all the questions that members of the public have regarding the Lansdowne 2.0 Redevelopment, but it has been designed to provide assurance on the key assumptions that supported the financial proposal presented to Council in November 2023. We believe some of the questions being asked will likely be addressed in future audit sprints planned to be undertaken as the project progresses.
Objective
The objective of this agile audit was to provide assurance that key components and underlying assumptions (i.e. budget and funding strategy) of the financial proposal provided to Council in November 2023 were based on reasonable and sound financial estimates.
What we found
Our audit demonstrated that the due diligence process reflected a significant effort to engage sufficient and appropriate expertise to validate significant financial assumptions and projections for Lansdowne 2.0. More specifically, our audit confirmed that all significant financial assumptions embedded in the financial projections were validated by subject matter experts. In several cases, the financial projections were updated to reflect the results of the due diligence activities.
We noted that many of the assumptions that supported the financial information were reasonable and were supported by detailed analysis and evidence.
For the cost of construction of the Event Centre and North Side Stands, estimated at $419 million, the estimates were on the lower end of City acceptable ranges for contingencies and utilities construction costs.
Given the inherent risks related to construction, including the delayed construction horizon and already increasing construction costs, we believe this approach has resulted in some construction estimates that are optimistic. As a result, construction cost estimates could be understated by $74.3 million, as at the time of our audit.
Additionally, there were specific assumptions, including Redblacks revenue growth and overall expense growth, that could have a significant impact on the potential downstream cashflow distributions from the partnership with Ottawa Sports and Entertainment Group (OSEG). Our audit has quantified the risk associated with not achieving these assumptions that are currently embedded in the financial projections. The impact of more modest assumptions range from $10 million to $30 million, per risk scenario, in decreased waterfall distributions available to the City over the life of the Partnership Agreement with OSEG.
In the end, our audit has highlighted and quantified specific risks within the Lansdowne 2.0 financial proposal and potential impacts to the City to help inform future decisions linked to this project.
We made two recommendations to ensure that:
- The Project Delivery Review and Cost Estimating Guide is reviewed and updated to clarify expectations on how to apply the ranges of estimates, including contingencies, based on specific risk factors; and
- Recent actual partnership results and modest future assumptions are considered in order to update the proforma projections related to the Partnership with OSEG.